Wednesday, 15 February 2012

Mervyn writes again

Mervyn has written yet another letter explaining why the Bank of England failed to meet its inflation objective. How many letters is that now? Is anyone counting?

Nevertheless, today's letter had a grim assessment of the UK economy:

The unwelcome combination of sluggish growth and high inflation over the past two years is a
reflection of the need for the economy to rebalance following the financial crisis and associated deep recession, together with rises in the costs of energy and imports.

Although inflation is now falling broadly as expected, the process of rebalancing still has a long way to go. Growth remains weak and unemployment is high. While the MPC can use Bank Rate or asset purchases to help ease the transition, there is a limit to what monetary policy can achieve when real adjustments are required.

The best contribution that monetary policy can make to high and stable levels of growth and employment is to respond flexibly and transparently to bring inflation back to target. The Committee remains determined to set policy to ensure that inflation is on track to meet the target in the medium term.

The last paragraph was somewhat surprising. Should we interpret it as saying that the Bank of England may change the focus of policy back onto price stability and forget about printing money as a means to kick start the economy. We can only wish, but I am doubtful that we will see any substantial shift in policy.

The line about the limits of monetary policy is a little disconcerting. It has taken four years of near zero growth, rapid inflation, and rising unemployment to realize that a zero interest policy may to not achieve "real adjustments".

2 comments:

Import prices are up because the pound is weak because interest rates are low. Energy costs are up because we are being levied to pay for windmills in a Knut like effort to stop the naturally occuring changes in our climate.

Why is this man still in his post? When did he last hit a forcast target?